The Buck Stops Here….??!

In a week that had the dollar bears falling in line to hammer the last nail on the dollar’s coffin, the greenback sported a rebound that was impressive to say the least…. and all of it apparently over an employment report that showed a slight dip in the jobs lost.

If one were to refer to the recent catalog of market responses to events, “good news” in the US typically went hand in hand with risky assets soaring and the dollar falling. However, this time markets chose to focus on a different theme – and (intelligently?) established a logical re-linking of good news with a stronger dollar. So much for market fundamentals!

The key question is whether this is just a blip in the larger scheme of dollar weakness or is it something more radical in terms of sentiment shift in favour of the dollar.

A peek into the chart of price movements reveals two defining developments –one in the EURO/USD and the other in its virtual mirror reflection, namely the dollar index.

EURO/$




As can be seen, a multi month uptrend spanning from March 2009 stands violated. If this is confirmed with 2 more days close below the trendline, it could have serious implications; given the market’s maxim – longer a trend is in force, stronger will be the price action upon a breach of the underlying trend.

Any pullbacks are likely to be limited by the support turned resistance trendline, currently at 1.4950-1.50, ushering fresh selling pressures towards 1.4625 initially and 1.4430 eventually.

$ index



We’ve been of the view for sometime now, that the current (probable) C wave could end anywhere between 73 - 74 territory. The breakout that can be seen in the $ index chart reinforces the view that the two converging trend lines culminating into an ending diagonal pattern – could take the dollar index in the medium term (over the next 6-8 months) towards 80 - 81.

That said, the above view will hold only if the current breakout is not a false whipsaw – as typically December is notorious for its volatile swings – courtesy, thin markets.

USD/INR




With 46 territory offering formidable support for the dollar - 4 times in a row now, the rupee could trip all the way to the trendline resistance at 47.50, especially of 46.75 gives way on a closing basis.

Break of 47.50-47.60 would however be critical in defining a complete trend reversal of the down move from late March 2009.